Lee & Man Paper Manufacturing Limited (HKG:2314) Shares Fly 27% But Investors Aren't Buying For Growth
Despite an already strong run, Lee & Man Paper Manufacturing Limited (HKG:2314) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.
Even after such a large jump in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Lee & Man Paper Manufacturing as an attractive investment with its 9.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Lee & Man Paper Manufacturing as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Lee & Man Paper Manufacturing
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Lee & Man Paper Manufacturing's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 25%. However, this wasn't enough as the latest three year period has seen a very unpleasant 57% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 6.3% per annum over the next three years. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.
In light of this, it's understandable that Lee & Man Paper Manufacturing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Lee & Man Paper Manufacturing's P/E
The latest share price surge wasn't enough to lift Lee & Man Paper Manufacturing's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Lee & Man Paper Manufacturing's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 2 warning signs for Lee & Man Paper Manufacturing (1 can't be ignored!) that you need to take into consideration.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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